Quantitative analysis in performance measurement is focused on understanding how well a portfolio did using mathematical processes. Where quantitative analysis fails is that it is susceptible to “revisionist history” or “reverse engineered” explanations by adjusting their explanations based on the numbers before them. In effect, deflecting responsibility for periods of poor performance or taking too much responsibility for periods of positive performance.
Qualitative analysis bring performance into the present and can help minimize “reversed engineered” explanations. Through periodic discussions, an evaluation of a manager’s thought process behind their decisions enables a firm to see the evolution of their decisions and the impact on returns. Over long periods of time, if the manager is worth their salt, the quantitative analysis will support the qualitative and vice versa. That’s when you know you have an alpha generator and not an alpha pretender.
Currently, very few, if any, investment firms use independent Qualitative Analysis to help evaluate their managers and decision makers. The focus is too much on the quantitative side which can be massaged to justify or support the managers oft changing reasoning. Using independent performance experts to manage the evaluation process and provide the necessary feedback to the front office would be significantly assist the firm maintain and find alpha generators.
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